What is the Federal Crime of Tax Evasion 

What is the Federal Crime of Tax Evasion

What is the Federal Crime of Tax Evasion? 

When a US person may have run afoul of the law on matters involving income tax, one of their first concerns is usually whether or not they committed tax evasion — which is a tax crime. In reality, most of the time tax violations are civil in nature and do not reach the level of tax evasion. Unlike civil tax violations, in order for the US government to show that the Taxpayer committed a tax crime, they have to prove it to a jury and reach beyond a reasonable doubt threshold. Out of all the different types of tax crimes, tax evasion is one of the more serious criminal tax violations and oftentimes will result in incarceration (the average jail time for tax evasion is still about 3 to 5 years). Tax evasion presents itself in all different shapes and sizes, but generally requires an affirmative act (e.g., filing a false tax return vs. not filing any return). Here are four common examples of tax evasion.

26 U.S. Code § 7201 – Attempt to Evade or Defeat tax

      • “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

All Cash Business (Tax Evasion Example 1)

John is a US Person who owns a cash business selling different types of merchandise. John’s local store has become very popular in the past few years, since John gives a discount to customers who pay in cash. He earns several hundreds of thousands of dollars a year, with the majority of it in cash.  John knows he received $500,000 in cash this year from his sales but decided only to report $200,000 when he filed his US tax return. This can be an example of tax evasion because John intentionally filed an inaccurate tax return in order to artificially reduce his tax liability — and evade the correct payment of tax. 

Untraceable Income Sources (Tax Evasion Example 2)

Peter runs an online store in which he only accepts cryptocurrency as a means of payment. Peter is aware that when he receives the cryptocurrency there are tax implications based on the value of the asset he is selling and the exchange value of the cryptocurrency he receives. Peter also has a small business that does not accept cryptocurrency and only accepts fiat. Peter intentionally only reports the value of his small business income on his tax return and none of the income associated with the cryptocurrency store. Peter also identifies “no” on the 1040 tax return question involving whether or not he had any cryptocurrency exchanges in the current year.

Income From Overseas (Tax Evasion Example 3)

Michelle is a lawful permanent resident who resides in the United States and has several bank and investment accounts overseas. Michelle is aware that she is supposed to report the income on her US tax return from her overseas investments. A few years ago, her grandmother passed away and the bulk of the estate was liquidated and placed into Michelle’s overseas bank account where she earns six figures a year in foreign investment income. Michelle knows she is supposed to include this information on her tax return but intentionally fails to do so in order to reduce her overall tax liability, since there are no foreign tax credits in the jurisdiction which generates the income and she thinks it is unfair to pay US tax on that income.

Money Held in a Third Party’s Name (Tax Evasion Example 4)

Scott is a small business owner whose business became much more successful in the past two years. Scott doesn’t want to pay tax on this newly found income, so instead of having the income go to his own bank account, he diverts the income to his girlfriend’s bank account and does not report the income on his US tax return.

Tax Evasion is Against the Law

In all of these examples, the Taxpayers simply broke the law. Tax evasion is illegal and while the risk of getting caught may be low, it is not zero. The consequences can be devastating and it is usually much better to proactively and quickly identify and resolve the issue rather than waiting for the other shoe to drop, which can also allow the problem to grow larger, perhaps to the point of no return.

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